Renting out our PPOR - tax implications?

Question: My husband and I are thinking of renting out our current PPOR and buy another property to live in. The median rent in our area is currently around $300 per week. We only owe $100,000 from the bank. What tax concessions can we claim when we convert our home to rental? Is it better to just sell rather than rent it out?

Answer: If the property ticks all the boxes as being a good solid long term investment it would make more sense to hang on to it….because the costs of selling and buying a new investment property being agents commission on sale, stamp duty and legal’s on purchasing a new one can be quite expensive…just to end up with a similar asset (and may not be as good as the existing property).

Based on the numbers above your rental should be approx $12,000 net and if you deduct the interest on $100,000 @ say 7% = $7,000 your net positive cash flow would be approx $5,000. On top you may then be entitled to claim depreciation on the building (if built post 1985) or any renovation or improvement work undertaken whilst occupying …..also on the fixtures and fittings.

To maximise this deduction on depreciation I would recommend a quantity surveyors report, the cost of this report is minimal compared to the benefits obtained. Assuming you will get some form of benefit from depreciation the net tax position would be minimal and you would have reasonable cash flow…being approx $5,000. I would also convert my $100K loan on this now investment property to interest only so to maintain the tax benefits and I would ensure you increase your principle repayments on the new loan for your new PPOR which will not be tax deductible.

On top of the depreciation you will be able to claim tax concessions on all costs associated with maintaining this property such as rates, repairs and maintenance, agent fees, travel if required and other sundry expenses.

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If you move out of your home and rent it out for a few years, when do you have to move back in if you wish to avoid paying CGT, if you want to sell this properrty later on? How long do you have to remain in this property before re renting it?

John Henry says on
14/06/2012 05:02:12 PM

Hi Irene,I heard that there is 6 years rule for this kind of scenario.

Pascoe says on
15/06/2012 12:52:52 PM

It would also pay to look at transferring the current PPOR to your partner under "love and affection" rule without any transfer fees and than you can claim the new loan that you get to obtain your new PPOR as a deduction. Basically this allows you to have all your loans on the new rental property and fully tax deductible.David, Chan correct me if I am wrong. Do you know of this strategy ?

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